Will ECB Push EUR/USD to 1.3000?

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Market Drivers for September 04 2014

BOJ’s Kuroda does not change size of QE
EZ GE Factory Orders up significantly

Nikkei -.33% Europe -.42%

Oil $95/bbl

Gold $1270/oz.

Europe and Asia:

AUD Retail Sales 0.4% vs. 0.4%

AUD Trade Balance -1.36MM vs. -1.77MM
EUR GE Factory Orders 4.8% vs. 1.6%

North America:

GBP MPC Decision 7:00 AM

EUR ECB Decision 7:45 AM

USD ADP Employment 8:15 AM

EUR ECB Presser 8:30 AM

USD ISM Services 10:00 AM

Its central bank day in FX and currency markets have been characteristically quiet as traders square up ahead of the BoE and ECB meetings scheduled later in the day. There is little anticipation of any dramatic announcement from either central bank, but traders will been on the lookout for any hints about possible further easing actions from the ECB.

Specifically, the market will want to know how much progress the central bank has made on its preparation for a possible purchase program of ABS securities. Given the small size of the ABS market, some analysts have even speculated that the ECB may expand its purchasing list to include private assets such as bonds. Any move in that direction is likely to pressure the euro lower as it will suggest that the ECB is seriously considering the possibility of a full blown QE program that would include the purchase of government bonds.

For now such speculation is premature, but rhetoric from Mr. Draghi will be key. If he simply reaffirms the stale points of the meetings past, the shorts will be sorely disappointed and the EUR/USD could see a knee jerk short covering rally on any inaction by the ECB. The pair has been heavily sold ahead of the event and the market is likely to snap back if it doesn’t get any concrete fresh news on the easing front. If on the other hand Mr. Draghi presents a detailed plan for upcoming ABS purchase program, along with any other easing measures, the EUR/USD will likely breach the 1.3100 barrier and could head toward a key test of the 1.3000 level as the day proceeds.

Elsewhere, the price action in Asia was subdued with BOJ failing to push USD/JPY back above the 105.00 level after Governor Kuroda ruled out any increase to QE for now. The Japanese economy remains hobbled by the recent sales tax increases but Mr. Kuroda remained confident that the current monetary policy path could offset any dampening of demand caused by higher taxes.

So far the Japanese monetary policymakers have been dead wrong in their assessment of the situation as Japanese growth and consumer spending has clearly slowed in the wake of higher taxes. With more tax hikes to come later this year, it will be interesting to see if they reverse course. For now however, an gains in USD/JPY will have to come from the dollar part of the exchange rate as markets await further confirmation of US relative growth. Todays ISM Manufacturing report due at 1400 GMT will be scrutinized carefully not only for it headline reading but also for any hints that it may provide for this Friday’s NFP report.

The market anticipates a slightly lower reading of 57.3 versus 58.7 the month prior, so any upside surprise could quickly lift USD/JPY back above the 105.00 level especially if the employment subcomponent shows expansion.

Boris Schlossberg
Managing Director

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